He Wrote the Book on Why Moats Fail | Ritavan on What Actually Compounds Instead

**Ritavan** (0:00)
If you want something defensible, the focus should be on figuring out if the business you have is a system that compounds in a way and at a rate that some other business you're comparing it with just cannot. And I think that is a much more fundamental idea that is independent of, oh, okay, does it have a moth? Okay, you deployed an AI tool successfully or you adopted an AI tool, because I think the big dashboard KPI now is AI adoption, right?
But adoption per se is meaningless. It's not in agility, it's not in speed, it's not in just in moving fast, right? It's about having an understanding of the game.

**Matt Zeigler** (0:46)
You're watching Excess Returns, the channel that makes complex investing ideas simple enough to actually use, or better questions lead to better decisions. I'm Matt Zeigler, I've got Kai Wu of Sparkline Capital here with me as my co-host. And our guest today is investor, speaker, author of Data Impact, and now what we're really excited to talk about with him today, System Gambit, Ritavan.
Welcome to Excess Returns.

**Ritavan** (1:11)
Thanks, Matt. Great to be here.

**Matt Zeigler** (1:14)
A long time coming, my friend. So most investors, and we talk to a lot of investors, especially when there's a quality bias. And let's be honest, it's embarrassing to say we like low quality crappy things. So we talk about quality, people have a checklist and one of the most common items on the checklist is, does this company have a moat? Brands, switching costs, network effects. You've got this book that says that question is almost besides the point. What's the test that you'd actually run on a company instead?
Yeah.

**Ritavan** (1:47)
About the moat, you can measure the thickness of the fort wall or something.
That's very often the image and it makes it sound as if you're standing in front of a fortress, you need to get out your measuring scale and then you write down, okay, it's that many meters and that's done. But it never is like that. And so I don't really like the idea of having the moat as an entry on the checklist because it's not something you can just take off. I think what is more important is if you want something defensible, the focus should be on figuring out if the business you have is a system that compounds in a way and at a rate that some other business you're comparing it with just cannot. And I think that is a much more fundamental idea that is independent of, oh, okay, does it have a moat or is it growing or whatever it is, right?

**Matt Zeigler** (2:51)
I mean, it's a perfect explanation of where you're coming from on this. And part of why we wanted to talk about this, this is what sets your concept of this apart. We don't normally talk about moats like this.
I want to get into a system gambit, and I want you to define it here at the top, because it's not just this make a sacrifice now for the payoff later. It's not that traditional chess gambit definition that jumps out in most of our brains. What are the three conditions that have to be true at the same time for something to actually qualify as a system gambit?

**Ritavan** (3:21)
Yeah, so just to take a step back, right? The word gambit is from chess, and in chess, what you do is you sacrifice a pawn or you sacrifice some form of material to gain a positional advantage. That then allows you to either win the game or dominate the game. And the system gambit is essentially generalizing that idea to systems, and hence to business and investing. And the idea is the following.
You are in a system, but you want to cross into a new system, right? So that's the difference with chess. You're not in the same game. You're trying to go in a new game. To get there, though, you need to sacrifice something in the current system. You want to gain a structural advantage, or you want to build a structural advantage, that then allows you to compound in this new system. And there are three properties that are super important. The first one is a self-improving loop. That means every iteration of that loop has to structurally get better. If that's not the case, you have a nice asset, right? You just have a nice asset, you don't have the compounding. The second important thing is path dependence, meaning if it's something that anyone else, with just more capital, can buy on the market, then you don't really, then you haven't really executed a system gambit because it's something that someone with more capital can acquire later on. So it has to be something that is built loop iteration by loop iteration. That's the path dependence. And I think if you have these three, these two things already, right? You're in a, you're in a very good place.